Meridian powers up

SOE has potential to pay bumper dividends in first years as listed company, says analyst.

Meridian's "energy margin" which nets out the effects of being both a seller and buyer in the wholesale market was $916 million. Photo / Simon Baker

Analysts say figures disclosed in Meridian's annual result makes it attractive to potential investors in spite of a near half billion dollar hit from the renegotiated Tiwai smelter deal.

The state-owned enterprise increased after-tax profit nearly 300 per cent to $295.1 million, including a $101 million gain from the sale of its half share in the Macarthur wind farm in Victoria, Australia.

Its net profit after tax was $295 million - up from $75 million last year - and underlying net profit after tax was $163 million, up from $106 million, when non-cash fair value movements and other one-off items are removed.

The profit statement does not include the $476 million asset revaluation, gross of deferred tax, reflecting the impact of the renegotiated agreement with New Zealand Aluminium Smelters, Meridian's single largest customer.

An analyst at Milford Asset Management, William Curtayne, said although the total dividend paid to the government had increased from $140.7 million to $252.4 million the company had the capacity to pay bumper dividends in its first years as a listed company.

"Interestingly, post Meridian's final dividend it will still only have $950 million of net debt. It could pay an additional $600 million of dividends and still have a balance sheet gearing ratio in line with listed peers Contact Energy and Mighty River Power," Curtayne said.

Meridian's "energy margin" which nets out the effects of being both a seller and buyer in the wholesale market was $916 million. That is up 28 per cent on $763 million the year before, which was a dry year, but down on the two previous years ($950 million in 2011 and $942 million in 2010).

A return to normal hydro inflows - for the year as a whole - helped, and generation was up almost 10 per cent on the year before, but that masked a 15-week period from mid-February to mid-May when wholesale prices were high and Meridian's share of generation tumbled.

The biggest increase in its costs was a 33 per cent rise in transmission charges to $115 million, driven by Transpower charges for the interisland (HVDC) link. Its operating earnings or ebitdaf (earnings before interest, tax, depreciation, amortisation, changes in fair value of financial instruments, impairments and gain or loss on sale of assets) was $585 million, up 23 per cent on $477 million the previous year but down on the result from the two years before.

Phillip Anderson, an analyst at Devon Funds Management, said ebitdaf exceeded expectations and reflected a more conservative approach to managing risk.

"This really highlights how they've managed to turn that risk management around. It's encouraging when you think about this company in terms of it being a dividend-paying stock and wanting a sustainable defensive yield," Anderson said.

Listing could happen by end of October

Meridian boss Mark Binns was blocked from mentioning the company's prospects at its result briefing yesterday because of its planned sharemarket float, but behind the scenes analysts are crunching the numbers.

Analysts for the three investment banks appointed to partially privatise the country's largest state-owned energy company visited Meridian's Manapouri power station last month and are expected to produce reports on the company by early next month.

Those reports aren't allowed to be released to the public but are sent to institutional investors who use them to help decide how much they are willing to pay for shares in the company.

The Government is expected to reveal within weeks the exact structure of the Meridian sell-down and the incentives it will use to entice retail investors to buy it. Indications are that a prospectus could be out by late September with the listing set down for the end of October.

The Government is said to be favouring an instalment receipt model where investors pay half of the value of the shares upfront with a second payment made at a later date.

The incentive is that investors get the full dividend from the beginning, making its dividend yield very attractive.

The challenge for the Government will be deciding exactly when investors will have to pay the second instalment, given that next year is election year.